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Morningstar | Tsingtao’s 1H Profits Slightly Missed Due to Lower-Than-Expected ASP Increase

Narrow-moat Tsingtao Brewery posted moderate growth in the first half that slightly missed our forecast, with revenue and net profit up 0.6% and 13.4% year on year, respectively. Although the company’s 0.9% volume growth was higher than that of industry leader CR Beer, its average selling price increase of 4% was much lower than CR Beer’s 13% ASP hike. Gross margin deteriorated due to higher raw material costs, but the operating profit was down only by 10 basis points from the year-ago period, thanks to effective reduction in selling expenses.

In the medium term, we believe Tsingtao will gradually improve its profits on the back of the premiumization trend and maintain its leading position in the Shandong province. However, we think the intensifying competition in the premium beer segment will likely crowd out the company’s market share outside of its hometown, particularly in southern China. We retain our narrow moat and stable trend ratings, as we believe the firm’s competitive advantage from its intangible assets is intact. Our five-year revenue and net profit growth forecasts of 3.6% and 13% over 2018-22, respectively, are also unchanged. While we maintain our A-share fair value estimate at CNY 29, we trim our H-share fair value estimate to HKD 35 from HKD 36 to account for the depreciation of the Chinese yuan against the Hong Kong dollar. We think the shares are slightly overvalued at current levels.

On the revenue front, Tsingtao’s first-half revenue came in at CNY 15.2 billion, up 0.6% from the year-ago period, lower than its major competitor CR Beer’s 11% sales growth and our 2% forecast. This also implied that second-quarter revenue declined by 1.5%, compared with 3% year-on-year growth in the first quarter. However, first-half sales rose 4.9% year on year on a comparable basis, owing to the company’s implementation of the new revenue standard during the period.

Tsingtao’s sales volume of beer for the first six months was 4.57 million kiloliters, growing 0.9% from the previous year, ahead of the 1.5% volume declines of its major competitor CR Beer. Encouragingly, the premium beer segment saw 6.7% year-on-year volume growth, accounting for 21% of total sales volume, thanks to the ongoing premiumization trend. In contrast, Tsingtao’s implied 4% ASP increase was much lower than CR Beer’s 13% price hikes during the same time. Nevertheless, we still think Tsingtao has pricing premium over CR Beer, given that its ASP of CNY 3,316 per kiloliter was 17% higher than CR Beer’s CNY 2,827 per kiloliter. Meanwhile, we saw the company’s business in south and southeast China markets continued to worsen, with sales down 28% and 20% year on year, respectively.

Despite ASP increases, the company’s gross margin in the first half, down 2.6 percentage points to 39.4%, was still under pressure with higher raw material costs. By comparison, CR Beer’s gross margin improved 2.5 percentage points during the same period, bolstered by higher ASP hikes. Thanks to effective cost reduction, Tsingtao’s selling expense ratio dropped by 2.6 percentage points year on year, leading to a 10-basis-point decrease in the operating profit margin in the first half. Due to higher other income and lower taxes, net profit increased 13.4% year on year to CNY 1.3 billion.